Comments on Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? As of mid-December, the average thirty-year fixed-rate mortgage was near its historic low of about 3.3 percent, or half its level in August 2007 when financial turmoil began.TypePad2012-12-21T17:54:23ZNew York Fedhttp://libertystreeteconomics.newyorkfed.org/tag:typepad.com,2003:http://libertystreeteconomics.newyorkfed.org/2012/12/why-isnt-the-thirty-year-fixed-rate-mortgage-at-26-percent-/comments/atom.xml/Blog Author commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017ee70bf13c970d2013-01-07T18:22:11Z2013-01-07T19:19:42ZBlog Authorhttp://profile.typepad.com/nyfedresearchThank you for your comments. To David K., an approximate aggregate OPUC calculation can be obtained by multiplying gross MBS...<p>Thank you for your comments. To David K., an approximate aggregate OPUC calculation can be obtained by multiplying gross MBS issuance and OPUC per loan. However, as noted in the post, one needs to subtract costs (other than GSE guarantee fees) to parse out profits. </p>
<p>To Steve Thomas, this would be an interesting exercise, but not all required information is publicly available (in particular, lender-specific info on points paid by or to the borrower). </p>
<p>To Dan, changes in LO compensation may have contributed to what is happening in the market (by changing the attractiveness of third-party originations), but at least in the aggregate series from Freddie Mac&#39;s PMMS, there hasn’t been much of a change in the number of points paid by borrowers over the past few years. As for your second point, it&#39;s not the coupon of an MBS that matters, but rather the risk-adjusted yield on the bond. </p>
<p>To Chris Mayer, we try to look at the potential impact of regulation on the valuation of servicing rights, and find a non-zero but limited impact. However, there are certainly other potential channels due to regulation that we leave out, and it may indeed be true that those channels contribute to limited entry or exit from the business, thus limiting capacity and sustaining profits. All else equal, less regulatory uncertainty would of course always be beneficial in mortgage and other markets. However, it may also be the case that the reduction in capacity by some incumbent lenders is driven more by past losses in mortgage lending and a desire to get out of that line of business rather than the current conditions and profitability per se. </p>
<p>To Lt, notwithstanding the widening in the primary-secondary spread, mortgage rates are at historic lows, and LSAPs have eased financial conditions beyond mortgage markets. Please see President Dudley&#39;s speech that we cite in the post for more detail. </p>
<p>Finally to Monitor Bank Rates, we use the average rate, rather than the lowest advertised rate, as a proxy of the typical rate that a consumer is offered.<br />
</p>Monitor Bank Rates commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017d3f8cf1a0970c2013-01-06T14:20:40Z2013-01-07T17:27:49ZMonitor Bank Rateshttp://www.monitorbankrates.com/mortgagesThe spread between the two markets is greater that it has been in years past but if you look at...<p>The spread between the two markets is greater that it has been in years past but if you look at the lowest advertised rates instead of the average rates published by Freddie Mac the spread narrows considerably. You can find fixed 30 year mortgage rates today advertised as low as 2.875 percent, a lot lower than the average rate of 2.34 percent in this week&#39;s PMMS and a lot closer to the 2.60 percent rate. </p>Lt commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017ee6e8a9a4970d2013-01-03T18:01:42Z2013-01-03T21:16:24ZLtSo the bottom line is that Fed efforts to lower rates are - at least in part - illusory, and...<p>So the bottom line is that Fed efforts to lower rates are - at least in part - illusory, and the Fed is helping economic growth only indirectly as a function of helping banks. The Fed pads bank profits, and if banks feel generous they may deign to share some of that with borrowers?</p>
<p>It&#39;s good to be a banker.</p>
<p>Financials (XLF) are the second best performing sector since March 13, 2009 (+173%). Trailing consumer discretionary (XLY +199%) but well ahead of the other sectors (industrials XLI +152%).</p>Chris Mayer commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017d3f6c10fe970c2013-01-02T20:42:27Z2013-01-03T01:04:42ZChris Mayerhttp://profile.typepad.com/cm310Having attended this conference, Andreas and David have done a great job summarizing the comments and ideas. Their paper is...<p>Having attended this conference, Andreas and David have done a great job summarizing the comments and ideas. Their paper is excellent. However, I should express a belief that regulation and higher costs and risks play a bigger role in explaining the growth of this spread than is commonly perceived. </p>
<p>One key observation: capacity is constrained not just because lenders are not investing more in capacity, but some large lenders are actually shrinking their mortgage origination capacity. Reducing capacity is inconsistent with higher risk adjusted profits. At least some lenders are choosing to reduce capacity despite seemingly higher profit margins.</p>
<p>Regulators could do more to be sure there is greater certainty about putback risk, for example. A candid conversation with lenders who are voluntarily shrinking capacity might generate additional observations. As well, neither the GSEs nor FHFA has credibly explained why they continue to leave barriers in place to competitive refis...instead these parties seem to argue that there aren&#39;t barriers to different servicer refis despite the evidence to the contrary in this paper. </p>Max Rockbin commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017ee6d96bcd970d2013-01-01T23:56:07Z2013-01-02T00:40:08ZMax Rockbinhttp://bestportlandrentals.comIf you could find one honest, candid Jr. VP at any major bank, he or she could give you a...<p>If you could find one honest, candid Jr. VP at any major bank, he or she could give you a breakdown of their profit margin on a mortgage, including much more detail than the analytic guesses outlined in the white paper. They know where their profits come from and how much they are.</p>
<p>The big question not answered is: Why is market competition not working? Why doesn&#39;t a new Countrywide pop up that would cut profit margins (OPUC if you prefer)to less exploitive levels? Not enough underwriters? Half the population is an unemployed former mortgage underwriter.</p>Dan commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017d3f5d6d6a970c2013-01-01T01:32:13Z2013-01-02T00:40:08ZDanOne reason for the higher mortgage interest rates after 2008 is the Dodd-Frank Act. The costs of licensing and compliance...<p>One reason for the higher mortgage interest rates after 2008 is the Dodd-Frank Act. The costs of licensing and compliance resulting from this legislation are significant. The fines/lender recapture/retribution policies put into place by Dodd-Frank also make the mortgage industry riskier for lenders/originators. In addition, the Dodd-Frank Act changed the way mortgage loan officers are allowed to be compensated. Pre 2008, loan officers would charge the consumer upfront points. Dodd-Frank calls this &quot;borrower paid&quot; compensation, and technically it is illegal for the LO to get paid on such a transaction. Also it was common to charge 1 point upfront and one point in yield spread via a higher rate. That practice is no longer allowed per Dodd-Frank. Therefore, all of the broker/originator compensation is worked into the rate which results in higher rates for consumers across the board. Obviously when the lender sells these above market rate loans on the secondary market there are greater profits than prior to Dodd-Frank. I would consult the Dept of Housing and Urban Development and compare how many upfront points consumers were paying pre-Dodd-Frank and compare that to industry numbers today. On another note, would there be interest from investors for a 30yr note at 2.6% when you can buy a bond that is guaranteed at a higher yield?</p>Steve Thomas commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017c352d3867970b2012-12-31T21:24:52Z2013-01-02T00:40:08ZSteve Thomashttp://WWW.CASTLEOAKLP.COMIt would be most interesting to measure and report on the primary-secondary market spread, or OPUC level, by lender name...<p>It would be most interesting to measure and report on the primary-secondary market spread, or OPUC level, by lender name or by originator size. THis would allow potentially for the FRB NY to direct its MBS purchase toward lenders most willing (or able) to pass on the subsidy to borrowers instead of rewarding all originators, including those who retain the subsidy for themselves as excess profit.</p>David K. commented on 'Why Isn’t the Thirty-Year Fixed-Rate Mortgage at 2.6 Percent? 'tag:typepad.com,2003:6a01348793456c970c017c352b2390970b2012-12-31T15:27:52Z2013-01-02T00:40:08ZDavid K.It would be interesting to see an estimate for the total gain to lenders over, say, the 2010-2012 period from...<p>It would be interesting to see an estimate for the total gain to lenders over, say, the 2010-2012 period from these higher-than-expected mortgage rates. And whose role would it be to force or encourage more pass-through?</p>